Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-32

1975-1 C.B. 14

Section 61 -- Gross Income Defined

IRS Headnote

Training expenses of removed air traffic controllers. Payments made by the Department of Transportation to or on behalf of individuals, removed from their positions as air traffic controllers, for expenses incurred in their training for other employment are not scholarships, fellowship grants, or governmental welfare type payments and are includible in the individuals' gross income and constitute wages under section 3401 of the Code.

Full Text

Rev. Rul. 75-32

Advice has been requested concerning the Federal income tax treatment of payments made to, or on behalf of, employees of the Department of Transportation for training expenses pursuant to 5 U.S.C. section 3381 (Supp. II, 1972), under the circumstances described below.

Section 3381, 5 U.S.C., as added by Pub. L. 92-297, Act of May 16, 1972, provides that an air traffic controller with at least five years of service is entitled to not more than the full-time equivalent of two years of training if he is to be removed as a controller for specified reasons, such as an inability to maintain technical proficiency. The Secretary of Transportation is authorized to pay or reimburse the employee for all or part of the necessary expenses of such training. During the training period, the employee is retained at his last assigned grade and rate of basic pay as a controller and is entitled to the increases in basic pay authorized by law. Upon completion of the training, the employee may be assigned to non-controller duties in the Department of Transportation, released for transfer to another Executive agency, or involuntarily separated from government service.

S. Rep. No. 92-774, 92d Cong., 2d Sess. (1972), states that the purpose of the Act is to improve the conditions of employment of air traffic controllers by offering job training and preferential retirement benefits to controllers removed from control work. The Report indicates that in the interest of public safety air traffic controllers should not be retained as controllers beyond the time they can perform satisfactorily, but that the qualifications of controllers for employment in other positions are not generally high. The Report further states that if the Government offers a controller an opportunity to train for other employment, the adjustment will be much easier for the employee, and the overall air traffic control program will be improved.

Federal Aviation Administration Order 3410.11, "ATCS Second Career Program," September 7, 1972, establishes the procedures for implementation of the Act. The order provides that second career counseling and testing will be made available to an eligible employee after his removal from a controller's position. The counseling results and test records are to be used as a guide in selecting the individual employee's second career training program and in developing a training agreement. The training agreement, which is to specify the training objective, the length of training, and the type of training authorized, must be approved by the employee and a representative of the FAA. Although there are no specific restrictions concerning the type of training that an employee may receive, the order states that the training authorized should lead toward a second career and should benefit the employee and the program.

The order provides that the FAA will pay for such items as the employee's tuition, books, and registration fees. The payments may be made either to the employee to reimburse him for the amounts expended for the items or directly to the training institution. If the selected training is available only in an area beyond commuting distance of the employee's home station, the employee will be reassigned to such area and reimbursed for his per diem expenses or for the expenses of moving his family and household goods, whichever is less.

Section 61(a) of the Internal Revenue Code of 1954 provides that unless otherwise excluded by law, gross income means all income from whatever source derived, including compensation for services.

Section 117(a) of the Code provides that in the case of an individual gross income does not include any amount received as a scholarship or as a fellowship grant. Section 1.117-3 of the Income Tax Regulations explains that a scholarship generally means an amount paid or allowed to, or for the benefit of, a student to aid him in pursuing his studies and that a fellowship grant means an amount paid or allowed to, or for the benefit of, an individual to aid him in the pursuit of study or research. However, section 1.117-4(c)(1) of the regulations states, in part, that any amount that represents compensation for past employment services shall not be considered to be an amount received as a scholarship or fellowship grant for the purpose of section 117 of the Code.

In the instant case the amounts paid under 5 U.S.C. section 3381 to employees of the Department of Transportation for their expenses, or paid directly to educational institutions on behalf of the employees, are paid by the Federal Government in its capacity as an employer. The payments are made to a specified class of employees for the purpose of ameliorating the effects of the employees' removal from their positions.

The instant case is thus distinguishable from situations where payments to individuals undergoing training or retraining are excludable from gross income because the payments are made from a general welfare fund in the interest of the general welfare and not for services rendered. See, for example, Rev. Rul. 63-136, 1963-2 C.B. 19, which holds that benefit payments made to individuals being trained or retrained under Federal legislation designed to aid the redevelopment of areas of unemployment and to deal with the problems of unemployment resulting from technological and structural changes in the economy are not includible in gross income.

Furthermore, since the amounts paid represent compensation for past employment services, they are not excludable from gross income under section 117 of the Code.

Accordingly, it is held that the payments made to, or on behalf of, employees of the Department of Transportation pursuant to 5 U.S.C. section 3381 are includible in the gross incomes of the employees under section 61(a) of the Code.

It is further held that such payments are "wages" for purposes of the Collection of Income Tax at Source on Wages under section 3401 of the Code.